Divergence Trade Setups - RSI Indicator
Divergence is one of the trade setups used by traders. Divergence trade setup involves looking at a chart & one more indicator. For our example we shall use the RSI.
To spot this divergence trade setup find two chart points at which price makes a new swing high or a new swing low but the RSI indicator does not, indicating a divergence between price & momentum.
Example:
In the chart below we spot two chart points, point A and point B (swing highs)
Then using RSI indicator we check the highs made by the technical indicator, these are highs that are directly below Chart points A and B.
We then draw one line on the chart & another line on the RSI technical indicator.
RSI Divergence Trade Setup
How to spot divergence setup
In order to spot this setup we look for the following:
HH=Higher High- two highs but the last one is higher
LH= Lower High- two highs but the last one is lower
HL=Higher Low- two lows but the last one is higher
LL= Lower Low- two lows but the last one is lower
First let us look at the illustrations of these terms
Divergence Trade Terms
Divergence Trade Terms
There are 2 types of divergence trade strategies:
- Classic divergence trade setup
- Hidden divergence trade setup
